Infrastructure Finance Reform

Infrastructure Finance Reform

Holding private interests’ hostage while you extort them for funding additional infrastructure should never be the answer

One of the largest stumbling blocks to providing housing affordability in the Portland Metro Area is financing required infrastructure. When land is made available in the Portland Metro Area for development, a local government must assume responsibility for the area and be willing to create an infrastructure master plan. These plans include added road capacity, water and sanitary systems upgrades, storm water conveyance systems and new parks. Each of these items cost additional money and determining where the money will come from is up to the local jurisdiction.

In Oregon, state government provides little to no resources for added infrastructure. Furthermore, most local governments follow a philosophy of placing as much of the burden for new development as possible on the new residents who will occupy a given area in the future. This seems like a sound system, except what it really means is that as much of the responsibility for paying infrastructure is NOT placed directly on the new resident. Rather, the burden is placed on private industry, specifically land development and builders to front the money for the development of infrastructure. This increased financial burden costs private industry millions of dollars in carrying costs and development delays and expects private industry to wait on sales for reimbursement.

Here is how the process plays out in areas requiring infrastructure agreements:

The local jurisdiction creates a capital improvement plan for improvements. This plan includes required roads, water, sewer and storm improvements as determined by the jurisdiction. It would be nice if the list included just necessary infrastructure improvements, but every jurisdiction treats its capital improvement plan like a Christmas tree and puts every possible improvement they can under the tree.

The developers, who have already spent significant time and resource getting land into the urban growth boundary, scream in horror and beg the jurisdiction to take the most onerous items off the list. The jurisdiction already knows which projects they are willing to give up, but since it’s a “negotiation” they begrudgingly give up projects they knew were never going to pass the smell test, basically giving nothing to the process.

The land developers, who are negotiating from a position of weakness in the first place (because they have options on the land and they need to develop the land to make their money back) end up agreeing to infrastructure improvements that aren’t necessary or are over-engineered because time equals money to them and they need finished product to achieve value. To the local jurisdiction, no development means no new tax revenue BUT its relative. It also means no new expenses. They are not motivated by time, giving them a distinct advantage in any negotiation.

Generally, the jurisdiction arrives at their “bottom line” and the developers agree to commit millions of dollars to improvements they don’t believe are necessary because they have no other recourse. The jurisdiction then decides how the money will come in and when. This is where things really go haywire.

Jurisdictions rarely want to spend any money on the improvements, so most of the expense is borne by the developer. The jurisdiction gives them “credits” against fees for the work, but if the amount of work outpaces the value of the credits, then the developer just gets more credits, even if they have zero value. Jurisdictions love to allow the developer to transfer or sell the credits to other developers in the area, but because the other developers all know you have no other place to sell them, they aren’t worth even close to full value. Meanwhile, the City doesn’t put out a dime; it just foregoes future revenue.

Furthermore, the jurisdiction never wants to be unpopular with its future residents or do any work at all to collect the money necessary. Instead, they turn to the “system development charge” a set of fees, sorted by infrastructure type (roads, water, sewer, storm water and for some reason parks) and place the total incremental cost of infrastructure on each new dwelling or building built in the given area.

These charges aren’t collected from the future homeowner, instead they are charged to the builder before they receive a building permit. These fees average $30,000 collectively but in urban growth boundary development areas they can be nearly $60,000 per home! The builder must carry that cost until they sell the house (which is often 4-6 months after the permit is issued) and even then, it’s not assured the builder will get the value of the charges back, it depends on what the buyer will pay for the home.

Infrastructure financing is labeled a negotiation but the deck is heavily stacked against industry. This process is a major reason why no home builder building under market rate conditions can manage to build an average single family detached home for less than 350k. Affordable Oregon will work to change this process by advocating for the following changes:

Legislation that requires jurisdictions to negotiate an infrastructure agreement in a predetermined period or require timely legal arbitration at the jurisdiction’s cost to finish the process. No more dragging the process out until the party with time constraints must break. Its not a negotiation, its passive extortion.

Balancing the infrastructure cost assignment with a heavier load going directly on future homeowners and business owners in expansion areas. Tools that should be used include bonding, local improvement districts and site-specific tax increment financing options. There are dozens of states who do exactly this for infrastructure financing. Local government in the Portland Metro Area chooses not to seek these solutions because they are not politically popular or because they are lazy.

Stop the ongoing practice of requesting oversized infrastructure improvements that will not serve an immediate need because the jurisdiction doesn’t want to pay for them later. If you want additional capacity for the future, you get to pay for it. Private industry is here to create housing options for the people who want to live here. Its Local government’s job to pay for improvements beyond what is needed for a specific development.

Expose jurisdictions that pad their capital improvement plans with over-priced and unnecessary projects to drive up the amount collected on system development charges. Eliminate the use of consultants hired by a given jurisdiction to provide supposed “third party” confirmation of costs and needs and hold local jurisdictions responsible for creating an honest set of needs based off real data.

Seek creation of a statewide infrastructure bank that may provide low cost loans to jurisdictions for the construction of major infrastructure at a lower cost. Affordable Oregon acknowledges the State of Oregon needs to step up and help with funding for infrastructure throughout the state. The creation of a statewide infrastructure bank that provides loans to jurisdictions seeking major improvements is a great way for the state to contribute.

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